One major change in the Small & Medium Enterprise (SME) R&D Tax Credit scheme in recent years has been the proposed introduction of anti fraud measures. These measures place a cap on payable R&D Tax Credits to SMEs. The driver for this change first announced in the 2018 budget and due to be legislated in the Finance Bill 2021 is a number of frauds. The court case relating to one of these was completed on the 26th of November 2020. Three men have been sentenced for between 5 and 9 years in prison.
The Court Case
Kath Doyle, Deputy Director, Fraud Investigation Service, HMRC, said: “These men tried to extract an astronomical sum of money by claiming tax relief from a scheme designed to help legitimate companies do work that seeks to make advances in science and technology.
“This wasn’t research and development, it was out and out fraud. HMRC will continue to create a level playing field for law abiding businesses by rooting out the minority who seek to abuse these schemes, as this result clearly shows.” Source and further detail –HMRC News Desk.
What are R&D Tax Credits?
The term “R&D Tax Credits” is used frequently to describe the entire R&D Tax scheme. This is slightly inaccurate. An SME R&D claim generates an additional deduction in the claiming company's tax computation. That may have the impact of reducing profits if profits are made. In those cases the benefit from the claim is a reduction in corporation tax. An R&D Tax Credit claim can only be made if after the additional R&D deduction a company is loss making. Taking an R&D Tax Credit is an option. Losses that related to enhanced R&D expenditure are surrendered for a 14.5% payable “cash” credit. This credit is worth less than the tax relief the losses might generate by being carried back or forwards, so a credit is not always taken.
What was the attempted fraud?
Based on the HMRC report, and details of tax frauds are always slightly limited, it appears the three men convicted attempted to claim R&D Tax Credits based on a “fake” transaction between the claiming company and what would be treated as a subcontractor in the R&D scheme. When HMRC investigated they asked for the bank statements to check if the transaction was “real”. They were given a fake bank statement to support the claim. This was an attempted out and out fraud, the R&D work was not done. The scale made this a fairly “stupid” attempted fraud as while HMRC do not tell tax advisers their processes it is hard to conceive the “system” would pay out £29.5 million without very serious checks being made. The claim did not stand up to HMRCs checks.
What have the consequences been of this type of attempted fraud beyond the impact on those involved?
“Victimless crime” is a misnomer. The government's response to this and other attempted frauds has been to introduce measures to prevent this type of fraud into the R&D scheme by capping payable R&D Tax Credits. This was first announced in the 2018 Budget. Implementation after a consultation has been delayed by Brexit, Elections, and Covid but the legislation has been included in the 2021 Finance Bill. Unfortunately, some genuine claimants doing R&D will no longer be able to get much needed cash through these measures. Even if tax payer funds were not lost in these crimes they will have a disappointing impact on some companies.
We will look at the measures in detail in an accompanying blog.
Chris Toms – Technical Director RandDTax.